A new study released yesterday by the Securities Industry Association shows that reducing taxes on investment income would not only enrich investors but would also, in the longer run, substantially stimulate economic growth, cut unemployment and even boost the federal government's tax revenues.
The study is based on computer simulations of how nine different tax strategies would affect the economy over the 1978-82 period. Data Resources Inc., a Cambridge, Mass., consulting organization, did the study using its computer "econometric" model of the U.S.
For example, the study says elimination of all taxes on capital gains --profits from investment in stocks, real estate and other assets -- would, for the five years in question, increase U.S. gross national product by $199 billion over what it would have attained otherwise.Business investment would climb an additional $81 billion.An additional 3.1 million man-years of employment would be created. And the government would collect an extra $38 billion in taxes for the 1978-82 period.
At the other extreme, treating capital gains as ordinary income (Currently half of long-term capital gains are sheltered from taxation) would reduce GNP by $115 billion, slice $73 billion from fixed business investment, cut man-years of employment by 1.53 million and reduce federal tax revenues for the five-year period by a cumulative $25 billion.
The reason for these somewhat surprising results is that "improving capital mobility through the tax system and encouraging savings and investment can improve economic growth to such an extent that both more investment and more consumption are achieved," according to the report, titled "Tax Policy, Investment and Economic Growth."
"Current tax policy discourages savings and investment through the imposition of multiple taxes on investment income at several levels," the study stated.
The SIA, which is the trade organization for Wall Street's major brokerage and investment banking firms, will use the study as ammunition to argue for tax changes that favor the investor when officials of the organization testify next week before the House Ways and Means Committee on President Carter's proposed 1978 tax program.
George L. Ball, president of E.F. Hutton and Co. and chairman of the SIA's policy committee called the study an "unbiased look" at the implications of tax policy changes on the economy, "though we in the SIA admit to having an ox to gore."
But Ball told a news conference the SIA was putting forward the report with its implications because "we believe it's in the public interest." He said the report was "not just designed as a sinecure for the fat cat."
In response to skeptics' questions about the political viability of a program to reduce taxes for investors, who are primarily wealthy, at a time when tax policy proposals seem to be going the opposite direction. Ball predicted that Congress would be "very receptive" to an analysis that showed a way for the United States to improve its economic performance after "tried and true methods haven't worked out."
He noted that business investment in the United States has been lagging and that the present tax system has "crippled the ability of smaller businesses to raise money in the marketplace."
Ball also called President Carter "a pragmatist" who would support a proposal that helped to achieve higher growth, higher employment while at the same time reducing the federal deficit and inflationary pressures.
However, last year the administration was known to have been seriously considering proposing tax changes that would have eliminated tax preferences for investment income over earned income, namely capital gains.
Coupled with such an elimination were sweetener proposals to do away with the double taxation of corporate dividends and reduce the maximum tax on investment income from the current 70 percent to 50 percent.
The Treasury Department reportedly backed off from such a sweeping overhaul of the tax system in 1978 --an election year -- in favor of a simplified $25 billion business and individual tax reduction plan now before Congress, meant to provide a quick stimulus to the economy.
However, the more comprehensive tax "reform" proposals, including the elimination of capital gains, have merely been shelved for the time being and not ruled out.
Data Resources did ask its computer what the impact of a proposal similar to the contemplated three-pronged White House plan would be. It said it would stimulate GNP by $50 billion over the five-year period and 1.41 million man-years of employment would be created. But capital investment was reduced by $32 billion from the baseline projections, and federal tax revenues were down $11 billion.
The biggest stimulus to the economy after the proposal to eliminate taxation on capital gains entirely would come from a plan to allow corporations to deduct the dividends they pay out to share holders from their taxes, just as they now deduct interest payments on debt. This, said the study, would result in a $171 billion boost to GNP over five years, a $49 billion increase in capital formation, 3 million additional man-years of employment, but a $21 billion drop in federal tax revenues.
One major, but debatable, underlying assumption of the study is that any money unlocked by changes in the tax system that would encourage individuals to sell stock would be largely reinvested in the stock market and that rising prices would help fuel economic expansion.
"The assumption concerning stock market prices is critical from the point of view of the macroeconomic effects of any policy change," the report noted. It admitted, "there is little empirical work concerning the impact of tax changes on equity prices."
But it assumed that "substantial movements in stock market prices can be expected to influence consumption materially," with the Data Resources model "quite sensitive to movements in stock market prices." A 10 percent rise in the market index, other things constant, "leads eventually to a 0.6 percent rise in gross national product, a 2.8 percent investment in fixed business assets and a 0.7 percent jump in consumption."